service tax

July 13, 2012

Budget 2012: Changes in Service Tax

Download From :www.simpletaxindia.net

http://www.simpletaxindia.net/2012/06/new-services-under-reverse-charge-in.html

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Disclaimer

This presentation has been made as a part of our initiatives to provide educational assistance at the door steps of our stakeholders. It does not command any statutory status and should not be referred to by way of a Departmental clarification on any subject. The users are strictly advised to refer to only the legal texts while drawing any inference on any issue.



8

Budget at a glance 4

Rules of interpretation 33

Place of Provision Rules, 2012 40

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Negative list concept

Point of Taxation 47

6

Miscellaneous 53

Towards GST 61



TRU

Budget at glance....

MOF

Negative list

Harmonization with CX

ST Rules

Cenvat Rules

Valuation Rules

POP rules

POT Rules

Reverse charge

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Miscellaneous 53

Towards GST 61



TRU

Negative list: concept....

MOF

6

Taxable

3. Exemption

1. Taxable territory

2. Negative list

Activity for consideration

Not mere IMAGE

I: Immovable property M: Money A: Actionable claim G: Goods E: Employee

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TRU

Activity....

MOF

Legal obligation to do or not to do an act:

A beggar playing music on road not taxable even if soliciting money

But taxable if same beggar performs at a function for consideration

May be active or passive i.e. forbearance to act

Non-compete agreements taxable;

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TRU

Activity....

MOF

“Direct” and “immediate” link between activity and consideration

Direct: no casual link

― Services received from government against taxes paid not taxable per se;

― Free seminar to educate about prudent investment indirectly promoting a mutual fund

― Services received from a club against membership: direct link of making the facilities available for use, whether or not immediately used

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TRU

Activity....

MOF

Immediate connection: not too remote

― amount received in consideration for life time contribution not taxable e.g. Nobel Prize;

― consideration may actually be payable at a later point of time but linkage should be immediate

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TRU

Activity....

MOF

Not to include any activity where no such reciprocity:

Activity without consideration …Tourist information free of charge

But many activities may have indirect or deferred or disguised considerations; need careful study

..Free TV channels: indirect consideration from advertisers

..Construction: deferred consideration

..Service provided ostensibly free with “persuaded” donations to a charitable cause: disguised

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TRU

Activity....

MOF

Not to include any activity where no such reciprocity:

Activity without consideration • Tourist information free of charge • Free TV channels

Consideration without activity: • Pure gifts • Tips and ex gratia payments • Personal obligations e.g. pocket money • Donations without conditions

11

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TRU

Consideration....

MOF

Not merely “against payment” Monetary or non-monetary: any thing payable (both

monetary and non-monetary) in return for provision of service

Recharges between MNCs; Adjustments between government undertakings

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TRU

Consideration....

MOF

13

1. Accidental damages

Not related to provision of service:

not taxable e.g. damages to a rented property

2. Damages for longer duration of use

Related to provision of service:

Taxable e.g. containers retained beyond permissible period

3. Subsidies

Taxable when influence the unit price: price must change proportionate to

amount given

Deficit subsidies not taxable

4. Amount received in court settlements

Consideration taxable;

Costs not taxable

Consideration

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TRU

Persons....

MOF

Two distinct entities – Service Receiver & Service Provider

Two exceptions

Establishments in non-taxable territory and taxable territory

are separate persons Unincorporated association / body of individuals and their

members: ― Clubs or associations ― Unincorporated JVs

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TRU

Not mere IMAGE...

MOF

1. Immovable properties No definition: thus definition as per General Clauses Act

applicable (not Transfer of Property Act: which is a negative definition)

Land, benefits arising out of land, things attached to earth:

― things rooted in earth; or ― embedded in earth; or ― permanently fastened to anything embedded in earth

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TRU

Not mere IMAGE...

MOF

2. Money

Any legal tender and other specified forms e.g. cheque/PN/electronic form

Following not taxable:

―Loans/deposits/investments;

―Commercial paper issued as promissory notes;

―Amount repatriated from abroad (circular 163 dated July 10, 2012)

However charges for such use or conversion taxable

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TRU

Not mere IMAGE...

MOF

3. Actionable claims

Defined in Transfer of Property Act: any claim to a debt other than a secured debt or beneficial interest in any movable property not in possession

Includes unsecured debts, lotteries;

Not to include coupons and vouchers

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TRU

Not mere IMAGE...

MOF

4. Goods

Sale of Goods Act, 1930: “stocks and shares” replaced with “securities”: wider meaning

― Securities defined SCRA, 1956; definition covers derivatives

― Derivatives too defined in SCRA, inclusive definition: covers contracts for differences

― Definition in section 45U of RBI Act, 1935 relevant: derivatives to include interest rate swaps and foreign currency swaps

Deemed sale of goods as per the Constitution [Article 366(29A)] specifically excluded but only to the extent of value of goods

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TRU

Not mere IMAGE...

MOF

5. Employee to employer:

Casual employees covered; contractual outside

Services provided outside the terms of employment will be taxable e.g.

―Private coaching beyond school hours when under no obligation under the contract taxable

―Bonus, overtime and termination amount not taxable

―Non-compete taxable

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TRU

Employer to employee..

MOF

Not excluded and thus taxable

Expenses recovered from employees for private use of company facilities: taxable unless otherwise exempt; can take Cenvat credit if employee registered

―Canteen charges (usually exempt unless AC and alcoholic liquor being served)

―To and fro transportation will be taxable;

―Stay in guest house Rs 1000 per day or more taxable

―Charges for private use of official car: taxable unless “right to use”

―Training: taxable

―Recovery of pay for breach of contract: taxable

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TRU

Payments to directors...

MOF

Not excluded and thus taxable:

Applicable to all kinds of directors except of government regulatory bodies

Any monetary or no-monetary consideration

Director’s fee

Commission/bonus

Company car/ travel reimbursements

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TRU

Excludes specified activities...

MOF

A. Similar to employees

1. Members of legislatures & local bodies

2. Persons holding constitutional positions: president/governor/ Judges

3. Persons holding positions of chairperson, member or director in an entity established by govt. e.g. regulatory bodies, commissions (not Ltd. companies)

B. Courts and tribunals against a fee

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TRU

Includes declared services...

MOF

A. Possibility of being wrongly considered as sale of goods or immovable property; specified in the interest of uniform implementation of law:

1. Renting of immovable property

2. Construction services in the sale of flats/ commercial complex

3. IPR Services: temporary transfer/use only

4. Information technology software: customized software (other than packaged software)

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TRU

Includes declared services...

MOF

B. Services other than deemed sale transactions (Article 366(29A)

1. Hiring, leasing or licensing of goods without transfer of right to use (effective control & possession).

2. Activities ‘related to’ delivery of goods by hire purchase/ payment by installments.

3. Service portion of Works Contract

4. Service portion of Catering contract

C. Agreeing to act or not to act or tolerate an act: forbearance

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TRU

Some declared services…

MOF

Construction

No major change in taxability from previous regime

Construction for own use is now taxable if > one residential dwelling unit unless otherwise exempted (low-cost housing)

Mere receipt as fixed deposit; colorable device

Resale by individuals before payment of all installments: not taxable; for remaining installments; new allottee liable

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TRU


MOF

Information technology

Sale of pre-packaged or canned software is sale of goods

A mere license to use such canned software, which is not transfer of “right to use” is a provision of service

Conditions of transfer place restriction on the free enjoyment of software

On-site development of software is service

Internet downloads also service

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TRU


MOF

Hire purchase

Possession is transferred (and not mere custody);

Hirer has the obligation to purchase the goods on payment of installments;

Mere hiring is not sale of goods

Types of leases:

Operating leases: Normally no option to purchase the property at the end of lease period

Financial leases: Option available to purchase

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TRU


MOF

Right to use

1. Transferee has the legal right to use the goods in his own capacity

2. For the period of transfer such right to use is to the exclusion of the transferor

….Owner can not transfer the same right to another person

3. Normally effective control and possession with the owner

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TRU

Charging section

MOF

There shall be levied a tax (hereinafter referred to as the

service tax) at the rate of 12 per cent. on the value of all

services, other than those services specified in the negative

list, provided or agreed to be provided in the taxable

territory by one person to another and collected in such

manner as may be prescribed

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TRU

Negative list: rationale

MOF

30

Criterion Services

Legal constraints

1. List II i.e. tolls, betting, gambling, entertainment & amusement, advertisement other than radio and TV, specified transportation

2. Services by diplomatic missions in India

1

Taxed as goods 1. Manufacture or production: both centre & state law:

may not amount to transfer of title 2. Trading of goods: forward markets

2

1. Education 2. Agriculture 3. Renting of residential dwellings 4. Funeral

Lasting entries 4

Administrative difficulties

1. Margin-based financial services: interest 2. Services by Government or RBI

3

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TRU

Area

• Transportation

• Construction

• Real estate

• Education

• Govt. and community

• Entertainment

• Business

• Miscellaneous

Taxability

Low High

Impact on major sectors

Changes

Railway by higher classes; repair of trucks/auto,

< 12 units and for personal use taxes, Repairs etc. of airports/ports/railways; Pvt. roads

Renting to govt., charities, > 90 days in hotels

Largely status quo, NSDC exempted; greater clarity provided: e.g. bundled services

To business entities reverse charged; regulators/autonomous bodies taxed

Film artists, sports commentary, IPL; reality shows; satellite hire

Director fee; non-compete, international calling cards, certification and cleaning

Marriage makers, couriers abroad, some services from J&K, demurrages as provision

TRU

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Miscellaneous 53

Towards GST 61



TRU

Rules of interpretation

MOF

33

Services v services

Normally uniform rate When differential

treatment: Specific over general Bundled services:

― Natural bundle: essential character

― Unnatural: highest liability

Goods v services

Dominant nature or pith and substance test; Rate same or higher (Notification 12/2003

to be rescinded)

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TRU

Rules of interpretation…

MOF

Reference to a service will not include reference to its input service:

Tolls and service used to collect tolls

A travel agent booking transportation by inland waterways

Specific will prevail over a general description:

Real estate agent: a service provided in relation to immovable property (Rule 5 of POP) or an intermediary (Rule 9 ibid)

Purpose for which description is relevant

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TRU


MOF

Bundle itself specifically defined in the law:

Outdoor catering and hiring of space or pandal, shamiana (abatement 30%) will not be outdoor catering (abatement 40%) or hiring of space (100%)

Transportation, with or without accompanied baggage, by stage carriage

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TRU


MOF

Service definable specifically as conglomerate of services

Convention in which organizer has been given stay, meals , access to health club, business centre, convention centre, pick-up and drop of delegates etc. as convention service

Freight forwarder giving packaging, loading/unloading, Customs clearance, local transportation and international transportation

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TRU


MOF

Naturally bundled

Meals and air/rail travel: air travel

Breakfast and hotel accommodation: hotel accommodation

Boarding school: education

Unnatural bundles

Unnaturally segregated: Dry cleaning billed as electricity, chemicals, ironing

Unnaturally joined: Construction and club membership

37

Guidelines specified in education guide para 9.2.4

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TRU


MOF

Unnatural bundles

Unnaturally segregated: Dry cleaning billed as electricity, chemicals, ironing

Unnaturally joined: Construction and club membership

38

Guidelines specified in education guide para 9.2.4

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Miscellaneous 53

Towards GST 61



TRU

Taxable territory

MOF

40

TT = India minus J & K; India defined in the Act to include EEZ

40



TRU

Main rule

MOF

41

ABC Service Provider

PQR Receiver

XYZ Service Provider

DEF Receiver

Not Taxable

Taxable (SR)

Taxable (SP)

Taxable Territory Non-taxable Territory

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TRU

Other rules

MOF

42

Presence of goods or receiver

Property

Admission & organization of

events

Specified services

Transportation

To determine the place closest to the point of consumption:

•Either the location of receiver is uncertain; or

•It will produce different result in respect of identical business for two different users

•Order: later prevails over previous

Place of provision

• Location of performance

• Location of property

• Location of event

• Location of provider

• Embarkation • Destination of goods

Service Objectives

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TRU

Intermediaries…

MOF

Meaning: person who arranges or facilitates a service between two persons but does not include a person who provides the main service on his own account:

Essentials:

Not applicable to goods

Two services: main service by principal to customer: e.g. air travel and own service to customer or principal i.e. ticket booking

Can not influence the characteristics or price of main service

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TRU

Intermediaries…

MOF

1. Call centre: There is only one service to a client

2. Stock Broker: Not an intermediary; dealing in goods (securities)

3. Freight forwarder: When books shipping space and resells: dealing in own account; not an intermediary

4. Money transfer: Person who reaches out foreign remittances by NRIs in India on behalf of foreign bank not an intermediary; Main service is transaction in money

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TRU

A few special cases…

MOF

1. Partly in TT and partly outside: Fully provided in TT; mainly an anti-avoidance rule; normally location specific services should be rendered by independent establishments (thus separate persons

2. Both parties outside TT: Exempted; Force of attraction and compulsory registration of foreign service provider principles not invoked under Indian Law

3. Both parties in TT: Taxed on reciprocal basis

4. Service recipient an individual: Exempted if use is non-commercial; errata in Education Guide ( Question 7.11.18)

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Miscellaneous 53

Towards GST 61



TRU

Point of taxation…

MOF

Rule changes from April 1, 2012:

Continuous supply made subordinate to Rule 4 & 5

Services by specified individuals and firms likewise

Rate changes (Rule 4):

10% to 12 % and a few others from 1.3.2012

Once again by way of abatements from 1.7.2012

Exemptions from 1.7.2012

New services taxed (Rule 5): 1.7.2012

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TRU

Point of taxation principles…

MOF

Once a POT is determined chargeability is decided; subsequent change will not change the chargeability

If POT is not determined under an earlier rule then governed by new rule and consequences follow

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TRU

POT in difficult cases…

MOF

49

Service Payment Invoice Completion POT

Works Contracts (WC) 20.3.2012 1.4.2012 10.4.2012 20.3.2012

Taxable WC with no effective rate change

20.6.2012 1.7.2012 10.7.2012 20.6.012

Taxable WC with effective rate change

20.6.2012 1.7.2012 10.7.2012 1.7.2012

Newly taxed WC 20.6.012 1.7.2012 10.7.2012 No Tax

-do- but invoice not issued in 14 days

20.6.2012 5.7.2012 10.7.2012 5.7.2012

Reverse charge If POT of provider before 30.6.2012 no tax on RC

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TRU

POT in difficult cases…

MOF

50

Service Payment Invoice Completion POT

Mutual fund agents (reverse charged)

10.4.2012 1.4.2012 20.3.2012 10.4.2012

Mutual fund agents (exempted)

10.7.2012 1.7.2012 20.6.2012 ?


10.7.2012 30.6.2012 20.6.2012 ?

On the mid night of June 30, 2012 POT is date of payment and one second past the service comes under rule 4, being exempt and no more reverse………….


10.7.2012 1.7.2012 20.6.2012 1.7.2012 (?)


10.7.2012 30.6.2012 20.6.2012 30.6.2012(?)

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TRU

Point of taxation …

MOF

Once a POT is determined chargeability is decided; subsequent change will not change the chargeability

POT in the previous example will remain the date of payment i.e. 10.7.2012

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Miscellaneous 53

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TRU

Works contracts

MOF

Normal value= Gross amount- value of materials included in such amount

Value of materials for the purpose of VAT to be such value

When VAT not paid on such value option to pay on actual cost or as follows:

Abatement

Immovable property

Original works: @ 40% of total amount

Others: @ 60% of total amount

Movable property: @ 70% of total amount

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TRU

Total amount

MOF

Where some materials supplied by receiver same to be added to FMV less amount charged for such materials by the receiver;

FMV to be determined as per GAAP

Cenvat credits available on materials to receiver but not to service provider

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TRU

Transaction to comprise exports if…

MOF

55

Both not mere establishments

Service not in negative list

Service provided outside India

Payment in convertible currency

Exports

Service provider in India

Receiver outside India

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TRU

If payment not received in 6 months…

MOF

Service will remain non-taxable, being provided in a non-taxable territory

…but input tax credits will need to be reversed

……extended period permissible

But if payment received before the period allowed it will comprise exports

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TRU

Cenvat reform

MOF

57

1 Facilitation: allow ITCs to abated services and simplified refunds and refunds on exempted services

2 Scientific allocation of common credits: proportionate to turnover; relevant period prescribed

3 Service-specific descriptions removed with further liberalization

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TRU

Reverse charge

MOF

58

Liability to pay

Service receiver: Portion payable:

• Transport: 40% • Manpower: 75% • Construction: 50%

Independent liability

Service provider: Portion specified: Transport: 60%; Manpower : 25% Construction: 50%

Avail ITC Refund if necessary

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TRU

Reverse charge

MOF

Liabilities of both the service provider and service receiver are independent of each other:

Small scale benefit available only to the service provider, if entitled

Unlikely for the listed services

Valuation of service receiver and service provider can be on different principles, if permitted by law e.g. works contracts

Liability for ongoing contracts as per POT Rules, 2011; not applicable if provider was liable before 1.07.2012

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Miscellaneous 53

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TRU

Towards common code for CX & ST

Commonalities

• Already common: Cenvat credit, many provisions incorporated in section 83 of FA 1994 e.g. Settlement Commission, appellate matters etc.

• Can be easily common: Essential processes like registration, return, assessment compliance.

• Difficult areas: Charging section and one common law

• Harmony with other laws: with VAT, Customs and Income Tax in matters relating to business processes: to the extent possible

A Vat at uniform rate is nothing but income tax

VAT/

Customs/

Income Tax

Central Excise

Service tax

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TRU

Roadmap to GST

TRU

62

Within2012

By year end

Ongoing Common tax

code

GST Network

Harmonized key processes & law

GST

Constitutional Bill

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TRU

Balancing budget

MOF

63

Negative list

Exports promotion

Facilitation

Improve competitiveness

Tax widening

Compliance

Budget 2012

63



Budget 2012:

Changes in S

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service tax

Economy & Finance

indirect consideration

deferred consideration

agreements taxable

nobel prize consideration

place of provision rules

service taxjuly

immediate link

se free seminar